Rating Rationale

Strengths:
* Strong market position in the mobile telephone segment in India: The market position is backed by a healthy subscriber and revenue market share with a pan-India network. The active wireless subscriber base was 306 million as of August 2019 (market share of 31.6%), as compared with 341 million as of August 2018 (33.6%). AGR market share (including national and international long distance) was 28.9% (30.6% including Tata Teleservices Ltd) for the quarter ended June 30, 2019. The company has large spectrum spread across 900 megahertz (MHz), 1,800 MHz, 2,100 MHz, and 2,300 MHz bands; this fortifies the market position and enables it to offer 2G, 3G, and 4G data services across India. Robust brand equity and quick response to changing conditions have helped to maintain a strong market position, despite intense price competition.

* Healthy and diversified operations in Africa and non-mobile businesses in India: Improvement in Africa operations was substantial, as demonstrated by the increase in the EBITDA (earnings before interest, tax, depreciation, and amortisation) margin to 44.1% in the quarter ended September 30, 2019, from 43.2% in the corresponding period of the previous fiscal. Operating performance of other businesses - digital TV, broadband, and fixed line, and Airtel business services - have also remained strong with a healthy EBITDA margin. Performance in these businesses should remain stable, thereby partially supporting cash accrual against pricing pressure in the India mobility business.

* Healthy financial flexibility: Financial flexibility is driven by investments in healthy businesses, including telecom towers (Bharti Infratel) and the Africa mobility business (housed under BAIN BV) as well as strong promoters. Initiatives such as sale of stakes in the African subsidiary, Bharti Infratel, and Bharti Telemedia have helped to contain debt. Bharti Airtel has wide access to financial markets, as demonstrated by its track record of raising significant funds at competitive rates across domestic and international markets. It has also adhered to its de-leveraging plan. Furthermore, the shareholders - the Mittal family and SingTel - have a strong reputation.

Weaknesses:
* Continued competitive intensity in the domestic mobile services segment: With the entry of Reliance Jio in September 2016, price competition in the domestic mobile services segment has intensified. This, along with reduction in call termination charges, led to a decline in ARPU (average revenue per user) to Rs 101 in the quarter ended September 30, 2018, from Rs 188 in the quarter ended September 30, 2016. Revenue from the Indian mobile services segment cumulatively declined 26.6% over fiscals 2018 and 2019.

Through measures like introduction of minimum recharge packs, company has been able to improve upon its ARPU to Rs 128 for the quarter ended September 2019 however this has led to increase in subscriber churn with loss of around 517 lakh subscribers over the 12 months through September 2019. On an overall basis, these steps have helped company increase its revenue and EBITDA by Rs 678 crore and Rs 568 crore respectively in the India mobility business over last couple of quarters. Ability to maintain ARPU growth and thereby improve operating revenue and profits in the India mobility business will remain a key monitorable.

* Moderate debt protection metrics: Intense competition in the India wireless telecom business has constrained profitability and cash accrual. Furthermore, significant capital expenditure (capex) for enhancing network capabilities has increased debt (including deferred spectrum payments), leading to subdued debt protection metrics: the interest coverage ratio was 2.43 times in fiscal 2019. Gross leverage was 5.08 times as on March 31, 2019 (net leverage of 4.5 times).

Company has however undertaken deleveraging since March 2019 through rights issue of Rs 25,000 crore. As a result, company's net debt was Rs 93,095 crore at June 30, 2019 and its net debt to annualized EBITDA ratio was 3.43 times for the quarter ended June 30, 2019 as compared to Rs 3.95 times an year ago. Company has also received USD 680 million and has issued perpetual securities of USD 750 million since June 2019. Further initiatives to deleverage and to grow operating profit will continue to be monitored closely.

* Exposure to regulatory changes and technological risks: The telecom industry remains susceptible to regulatory and technological changes. New technology could necessitate fresh investments or require existing networks to be overhauled.

Furthermore, telecom is a highly regulated market. Government reduced call termination charges for domestic calls to 6 paisa from 14 paisa, and for international calls to 30 paisa from 53 paisa; this constrained profitability of large incumbent players. Moreover, presence in multiple geographies exposes the company to international regulatory risks. In Africa alone, operations are spread across 14 markets, with the top five countries accounting for 60% of total revenue. Each market has its own regulatory environment and distinct consumer behaviour patterns.

Liquidity: Strong
There was a liquid surplus of more than Rs 13,000 crore as on June 30, 2019, a large part of which is likely to have been unencumbered. Company also received USD 680 million in July 2019 from the listing of its Africa business. Cash accrual, though weakened, should remain sufficient to meet repayment obligation of Rs 7,000 crore and Rs 13,900 crore falling due in fiscals 2020 and 2021, respectively. Capex requirement is likely to be moderate at Rs 22,000-24,000 crore per fiscal from fiscal 2020. However, the recent Supreme Court ruling could potentially impact liquidity if the company is required to pay in the short term. Liquidity will be further supported by deleveraging plans including stake sale in Indus Towers Ltd ('CRISIL AA+/Stable/CRISIL A1+'), amongst others.

Rating sensitivity factor
Upward factor
* Net leverage sustaining below 2.75 times, led by increase in cash accrual and timely execution of de-leveraging plans
* Sustained improvement in operating profits for India mobile segment while performance in other businesses remained steady

Downward factor
* Further decline in operating profit or material delay in execution of deleveraging plans, leading to net leverage of above 4 times on a sustained basis
* Larger-than-expected capex due to technological changes or debt-funded spectrum acquisition, constraining the financial risk profile